Kinaxis (OTCPK:KXSCF) is still a small player in cloud software, but its RapidResponse supply chain management product is highly rated by industry experts and the company has grown rapidly in the past five years.
The software, aimed at supply chain planning and analytics, helps large companies integrate, manage and balance demand-supply decisions across the enterprise. The software's core competitive advantage is its real-time information and scenario planning and the benefit for companies adopting it is faster decisions, improved on-time delivery and lower inventory costs.
Kinaxis has many Fortune 500 customers and the Gartner Group rated its software as a leader in sales and operations planning (S&OP) alongside major software providers such as Oracle and SAP. This is detailed on the company's website and in its investor presentation.
Post-IPO escalation in stock price
In less than two years since the company's IPO in 2014, the stock price has more than doubled to $36 but has come off with the rest of the market in 2016 to the $28 range.
While the stock will likely go up and down to some degree with the market in the coming weeks, the major question is whether the stock price can be maintained even at this lower level during 2016 after the company announced its 2016 guidance in its Q4 results on Wednesday.
Slower growth raises doubts
The company's guidance for 2016 is for revenues in the range of $107 to $110 million, which is 18% to 21% above 2015 revenues of $91.3 million (up 30% from 2014).
For adjusted EBITDA, the company said it will be between 24% and 28% of total revenue. It did not give a dollar amount, but assuming total revenue at the high end of the range at $110 million, that would be between $26 million and $31 million. In effect, there would be little change (or even some decline) from the 2015 recorded EBITDA of $30 million (which was a much higher 33% of total revenue).
Obviously, costs are rising and the EBITDA margin is being hurt.
While the company didn't give a 2016 estimate, it is unlikely that earnings per share can rise much if EBITDA isn't growing.
Assuming diluted earnings per share in 2016 of about the same as the $0.67 per share recorded in 2015, the forward P/E ratio for 2016 appears to be around 42 times.
Will investors be happy holding this stock at such a multiple?
Slower growth usually leads to margin compression
Investors have been attracted to Kinaxis because of its leading software, rapid growth, high recurring subscription revenues and good visibility (80%) of the year's upcoming revenues.
But the situation has changed. Revenue growth is slowing for 2016 and EBITDA/earnings may not grow at all.
Will the market continue to value this stock at a 42x P/E?
Perhaps they will, if other cloud software providers see their P/E multiples expand. Or if investors are willing to accept that growth will be stronger in 2017 and 2018 (the company hasn't given guidance for those years). Given the sizeable growth estimates for the software market that Kinaxis serves, a return to faster growth after 2016 may well happen.
But at this point in the market cycle, with investors increasingly in the risk-off mode, it is not the kind of environment where investors pay high multiples for slower revenue growth and stalled EBITDA or earnings.
There is a lot to like about Kinaxis as a leading-edge cloud software provider, especially given its past performance. It is beating the competition and has proven itself in many ways so far.
However, it is hard to believe that investors will continue to pay a 42x P/E multiple given the slower-growth guidance announced by the company. For that kind of multiple, the company will have to show it can do better.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.